The Federal Reserve, mixing concern about the feeble economy with worries about rising inflation, reduced short-term interest rates Wednesday for the seventh time since September, while signaling a pause in any additional rate cuts for now.
The Fed’s action brought the federal funds rate — the rate it charges banks for overnight loans — to 2 percent, from 2.25 percent, the lowest level since November 2004. It defended that step as necessary to counter the ailing housing sector and the “considerable stress” shadowing financial markets.
The move followed new indications that the economy remained fragile at best. The Commerce Department reported early Wednesday that the economy expanded only 0.6 percent on an annualized basis in the first three months of 2008, short of an overall downturn but still far from healthy.
The Dow Jones industrial average, which was trading up 178 points shortly after the Fed’s announcement, dropped sharply in late trading, ending down 11.81 points at 12,820.13.
Richard Yamarone, director of research at Argus Securities, said "claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia".
But John Ryding, chief US economist at Bear Stearns, said "the fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession".
The official verdict will be made by the National Bureau of Economic Research. It puts "considerable weight" on GDP, but uses measures such as employment and income as well.
Many analysts believe the economy will probably contract in the second quarter as companies cut back on inventory.
"The increase in inventories is likely unintentional: corporations were seemingly surprised by the cooling off in demand," said Drew Matus, senior economist at Lehman Brothers.
However, others argue that tax rebates will arrive just in time to boost consumer spending and keep second-quarter growth positive too.
Carlos Gutierrez, the US commerce secretary, said the report suggests growth will be "slower but positive" in the first half.
Real personal consumption increased at a 1 per cent rate in the first quarter — still positive, but the weakest growth since the second quarter of 2001.
Comments